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Heavy fines possible for wealth managers ignoring GDPR

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The EU General Data Protection Regulation (GDPR), formally taking effect on 25 May, 2018 will have a significant impact on the costs and operations of the banking industry in general, and private wealth management in particular.

A new report – ‘General Data Privacy Regulation – What Banks and Wealth Managers must do now before time runs out’ – from Swiss research company MyPrivateBanking strongly recommends banks and wealth managers to take quick and decisive actions to avoid strong negative repercussions.
 
“With fines of up to 4 per cent of a company’s annual global turnover, private management firms cannot afford to ignore this new, far-reaching general data protection regulation,” says Steffen Binder, research director of MyPrivateBanking. “GDPR regulation will have an impact not only on European financial institutions but any global firm that deal with EU clients. Swiss private banks, US banks, Asian wealth managers – you name it. The policy implications of this have a worldwide reach.”
 
While the GDPR should concern any company that collects and processes data, in MyPrivateBanking’s view the regulation contains articles that could be especially problematic for private wealth managers for the following reasons: The broad proscription of profiling in the GDPR could prove problematic for private wealth managers for two reasons. Firstly data is often processed using automated methods to determine a client’s risk threshold. Secondly, it is increasingly common for private wealth management companies to utilise so-called ‘robo advisors’ which conduct many of the rudimentary tasks of a private wealth manager through the use of data analysis and algorithms.
 
Any firm that processes data in the EU or on EU subjects either within or outside the EU will be subject to this regulation and its associated penalties for non-compliance. Given that many high net worth individuals seek private wealth management services across jurisdictions, it is important to consider how the territorial scope of the GDPR impacts the wealth managers’ operations.
 
The use of external administrators to process and store data is not uncommon given the amount of data collected by private wealth managers. It should be noted that under the GDPR, data controllers are responsible for any infringement on the rights and freedoms of the data subject that occur when a data processer, like an external administrator, is retained.
 
Many private wealth firms have operated for years, if not decades. If not all data has been transferred from previous storage facilities to the new systems currently in use by private wealth managers the principle of privacy by design could be violated and increase the chances of a data breach.
 
“The regulation contains articles that could be especially worrisome for private wealth managers, including profiling, relationships between data controllers and data processors, and territorial scope,” says Steffen Binder. “The extent to which these provisions will impact private wealth management firms is as of yet unknown, but it is possible that future fines and even litigation could arise from regulators’ interpretation of their applicability.”
 
Steffen Binder sees long-term regulatory challenges are on the horizon: “One of the key things to understand about this regulation is that regulators worldwide are keeping a close eye on this development to use it as a possible basis for additional regulations – for example, in the recent US Senate hearings with Facebook founder Mark Zuckerberg, the regulation was clearly mentioned as a potential starting for US regulation in the future. Therefore, in this way, GDPR is poised to begin a larger, global conversation about data privacy to an extent not seen before.”

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